Lessons from the Overall Evaluation of Family Policy – Expansion of Day-Care and Parental Allowance Come off Best

The Centre for European Economic Research (ZEW), the German Institute for Economic Research (DIW) in Berlin and the Ifo Institute – Leibniz Institute for Economic Research at the University of Munich have presented their key findings from a comprehensive evaluation of family related benefits in Germany. Experts recommend further investment in high-quality child care, but advise against increasing child benefits.

The German government has been spending about 200 billion euros per year on marriage- and family-related benefits without systematically monitoring the effectiveness of the numerous instruments and examining their interplay. The overall evaluation of these benefits commissioned in 2009 by the Federal Ministry of Family Affairs, Senior Citizens, Women and Youth (BMFSFJ) and the Federal Ministry of Finance (BMF) is the first attempt at a comprehensive impact assessment. The Centre for European Economic Research (ZEW), the German Institute for Economic Research (DIW) in Berlin, the Ifo Institute in Munich, and other institutions examined the most important of the 156 family policy instruments in Germany with regard to the five following objectives: securing families’ economic stability, improving the reconciliation of work and family life, compensating for disadvantages between families, positive early childhood development, realisation of the desireto have children. The analyses are primarily based on data from the German Socio-Economic Panel Study (SOEP) and the newly established micro database “Families in Germany” (FiD).

The analyses revealed one fundamental problem: while many measures are conducive to at least one goal, they hinder or ignore the realisation of others. Income splitting for married couples, for instance, grants some families a short-term increase in household income, but does not contribute to the reconciliation of work and family life. Publicly funded day-care and parental allowances come off much better. “They cause little or no conflicts of aims, so they should be expanded.” The researchers conclude that on the whole, German family policy could be much more effective. “Without question, not all the family policy measures taken by the federal governments and the legislative authority are negative. However, many aspects could be improved by strengthening the most successful instruments and implementing reforms in some areas.”

High-quality day-care is the only measure without conflicting aims

According to the institutes’ evaluation, publicly funded day-care is a particularly successful instrument. “Given a high quality of the service, day-care for children is the only measure that substantially affects all objectives in a positive way without counteracting any other aim,” says C. Katharina Spieß from DIW Berlin. This instrument is supportive of parental employment and thus stabilises the income of families. Furthermore, it facilitates the realisation of the desire to have children and improves positive early childhood development. “With the help of only one instrument we can achieve at least four family policy objectives.”

Currently, government spending on day-care for children amounts to some 16.2 billion euros per year. “Without this subsidy, the rate of working mothers in families with two to three year-old children would be 27 instead of 37 per cent. On average, families with lower incomes would have to pay 286 euros more per month,” adds Spieß. For this reason, the experts recommend further investment in day-care. When it comes to the quality aspect of day-care, Germany has been ranging on an only average level. Consequently, funding should in particular improve the quality of day-care. This would help the children and the government. DIW studies suggest that children who visit day-care facilities one year earlier develop everyday skills much quicker than others, given comparable circumstances. In addition, the funding of day-care centres provides the best cost-benefit ratio of all family policy measures. “Day-care allows mothers to work. As employees, they pay taxes and social security contributions, so a substantial share of the benefit is self-financing,” says Ifo researcher Helmut Rainer. However, the experts advise against relieving parents of all fees, as has been discussed repeatedly. Instead, the parents’ dues should be invested in a better quality of day-care for children.

Expansion of parental allowances and after-school child-care required

With regard to schoolchildren, the experts give a positive assessment of the expansion of full-day care. It contributes to the financial stability of families and improves the reconciliation of work and family life. The experts also consider parental allowances (“Elterngeld”), currently amounting to about 4.6 billion euros a year, to be an efficient benefit. “Mothers have taken relatively long maternal leaves in Germany, compared to other countries. Since the introduction of the new parental allowances scheme in 2007, career breaks have become notably shorter. The number of women who go on parental leave during the child’s first year has increased, but at the same time, more women return to work in the child’s second year,” explains Katharina Wrohlich from DIW Berlin. Mothers who take longer career breaks suffer losses in income and pension on the long term. For this reason, they benefit in two ways from returning to work in shorter time: On the short term they earn more money, and they can expect higher pensions in the future. “If parental allowances were modified to render the division of employment and family work between fathers and mothers more attractive financially, the positive effects could be increased even further,” says Wrohlich. This could be achieved by introducing more “partner months”, that is extending parental allowance if both partners reduce their working hours for child-rearing, or by improving options for part-time work.

Increase in child benefits not recommended

The government spends almost 40 billion euros per year on child benefits and child allowances. The researchers confirm that these measures substantially contribute to the financial stability of families. Young families and future parents can count on benefits and allowances worth 65,000 euros on average. However, these instruments primarily produce an income effect. It is particularly families in the middle or upper income range who benefit. These benefits are hardly an incentive for parents to increase their participation in the labour market. “Child benefits have no strong impact on parents’ behaviour. Against the backdrop of tight public budgets, increasing these benefits is not the best strategy to meet the goals of family policy,” states Helmut Rainer from the Ifo Institute.

Poor assessment for income tax splitting for married couples

Income tax splitting for married couples increases, at least in the short term, the household income of families in the middle or upper income range. However, it negatively affects the reconciliation of work and family life. According to the researchers responsible for the evaluation, this is the core problem of this family policy instrument. “Criticism of this benefit is justified, because it is an incentive for secondary wage earners – women in most cases – to work less. This has impact on the economic stability of families,” says Holger Bonin from ZEW. Without income tax splitting for married couples, significantly more mothers would participate in the labour market.” Alternatives such as the “Realsplitting”, which is modelled on the maintenance allowances for divorced spouses, or individual taxation including deduction of maintenance payments (until deductions equal the basic tax-free allowance) would not only improve the reconciliation of work and family life and contribute to women’s financial security. Moreover, funds worth several billion euros could be re-allocated to finance other, more successful family policy measures,” adds Bonin.

“All in all, many successful measures such as parental allowances and the expansion of day-care centres have been introduced or intensified in recent years,” the researchers conclude. “Still, there is room for improvement. Instead of spending money on income splitting for married couples, for example, we should invest in the expansion of day-care for children.”

For further information please contact

Prof. Dr. Holger Bonin, Telefon: +49 (0) 621 1235-151, Email bonin@zew.de